The typical consumer’s food basket in the base year 2015 is as follows:

         32 chickens at $4 each

         15 hams at $7 each

        10 steaks at $8 each

A chicken feed shortage causes the price of chickens to rise to $5.00 each in the year 2016. Hams rise to $7.00 each, and the price of steaks is unchanged.

a. Calculate the change in the “cost-of-eating” index between 2015 and 2016.
  

Year	Cost of the basket
2015	$
2016	$

 

 Instructions: Enter your responses rounded to one decimal place.
 
 The official cost-of-eating index has   (Click to select)   increased   decreased  by  %.
 
 
 b. Suppose that consumers are completely indifferent between two chickens and one ham. For this example, how large is the substitution bias in the official “cost-of-eating” index?
 
 The  increase   decrease  in the cost-of-eating index is  %. The   (Click to select)   underestimate overestimate  of inflation in the cost of eating reflects substitution bias.